Technical Update vol. 29 no. 42 - Employee or Independent Contractor?

Counties, like many employers, often rely on independent contractors for a variety of services. This can be appropriate when workers are properly classified under state and federal law, which reduces the risk of liabilities such as back wages, payroll taxes, or denied benefits claims. In 2025, the U.S. Department of Labor (DOL) and the IRS will continue to prioritize worker classification enforcement, as misclassification is estimated to contribute more than $8 billion in unpaid taxes annually. Additionally, Colorado has increased its own oversight in coordination with federal agencies. Counties are encouraged to remain attentive to these developments and review practices regularly to ensure compliance.

THE LEGAL LANDSCAPE IN 2025

In recent years, rules regarding worker classification have shifted. A 2020 rule that narrowed the definition of “employee” was later withdrawn, reverting to a broader, more complex framework. As a result, the standards can be difficult to navigate.

It is important for counties to recognize:

• Workers cannot waive their rights under the Fair Labor Standards Act (FLSA).
• Agreements to be classified as a contractor do not override federal or state law.
• Offering alternative benefits in place of overtime does not remove an employer’s obligations under the FLSA.

KEY TESTS FOR CLASSIFICATION

Several tests may apply when determining whether a worker is an independent contractor or an employee:

• IRS Test: Focuses on the degree of control an employer has over the worker.
• Economic Realities Test (DOL): Considers how dependent the worker is on the employer, whether the work is integral to the business, and the worker’s opportunity for profit or loss.
• State Tests: Colorado applies its own standards, particularly for unemployment insurance and workers’ compensation, which may be stricter than federal guidelines.

RISKS OF MISCLASSIFICATION

Misclassification can expose counties to significant liabilities, including back taxes, penalties, and claims for unpaid overtime or minimum wage. It may also trigger obligations to provide benefits such as workers’ compensation, health coverage, or retirement programs. These financial impacts are often compounded by the administrative burden of responding to audits, resolving disputes, and managing legal processes, all of which draw resources away from core county services. Consistently applying classification standards helps limit these risks and supports compliance.

BEST PRACTICES FOR COUNTIES

To reduce exposure and strengthen compliance, counties may benefit from establishing clear processes around worker classification. This includes reviewing contracts to ensure that roles and payment terms are clearly defined, maintaining documentation to support classification decisions, and providing training to ensure that HR staff and department heads are familiar with applicable standards. Counties may also find it helpful to consult legal or regulatory resources when classifications are uncertain or complex.

Monitoring changes in federal and state law is also important. Because classification rules continue to evolve, counties that stay informed and periodically review their practices are better positioned to adapt quickly and reduce risk. Taking these steps can help counties approach worker classification in a consistent, transparent, and legally defensible manner.

WHAT THIS MEANS FOR COUNTIES

Worker classification remains one of the most complex areas of employment law, and counties are not exempt from these requirements. Federal and state regulators continue to closely monitor compliance, and misclassification can result in financial obligations that are challenging for any county's budget. Counties are encouraged to review applicable standards, apply them consistently, and remain up to date on changes in the law. Taking these steps supports compliance and helps ensure clarity and fairness in the classification of workers. For questions, please contact CTSI at (303) 861-0507.